I always hear people talk about how hard it is for them to save money. People are always saying that things cost too much and that there isn’t a enough money to save extra at the end of the day. Now this is coming from people who are making $80k or $100k. That is above the average household income in the United States. This doesn’t make much sense to me because there are plenty of households that make much less than this and still manage to get by. So how do I save money?
For me I’ve forced myself to save by creating an environment where I feel poor. Years ago, when I was in college I lived in a truly impoverished state with very low income and high bills (thanks rising tuition). Even though I was essentially living on about $600 dollars a month I made it work through creative applications. I didn’t feel poor even though by all standards I was. After graduating and getting a real “grown-up” job I was careful to avoid lifestyle inflation. How did I do this? By forcing myself to be poor.
When I got my first paycheck after college I remember being shocked at how much money it was. I remember some of my friends saying similar things to me when they first started getting a paycheck. Everyone wondered “What am I supposed to do with all this money?” I think most people start off this way when they aren't used to managing that much money. But people figure it out and the initial amazement at how are they going to spend all this money turns to “how could I afford to save money, I spend everything I get?” This is due to lifestyle inflation. It can start off small, with a new fancy house and a new car, but then it turns to an even bigger house, dinners out several times a week, Uber rides all over time, new clothes, the newest gadgets, show tickets, and last minute plane tickets to cool festivals. And suddenly they need to make more money, because there isn’t any left at the end of the day. After all, its their money, haven’t they earned it?
I had a similar thought, but I knew that I wanted to pay off my higher interest students loans first. I figured that the money I was earning wasn’t really mine since I had so much debt. And I knew I had a lot of expenses coming up. My computer I had used through college was dying, my car was to the point where something broke in it every few months and I was pretty sure it wouldn’t pass an inspection. My boyfriend had proposed, so I had a wedding to pay for. I had $37k in student debt, and I knew that I didn’t have anyone to fall back on if I had money problems. So instead of inflating my lifestyle to my paycheck, I got to work on a budget and money plan.
From day one, I put aside part of my check for retirement. I didn’t want to get used to seeing that money in my bank account. If I never got it, I couldn’t miss it, right? I had heard that many young professionals don’t contribute to their retirement at the beginning because they figure they need to get an emergency find first and retirement is a long way off. But when you take this approach, the few months you were going to not contribute to retirement turn into years and before you know it you’ve lost out on decades worth of compounding interest! I wasn’t going to allow myself to fall into that trap.
After that, I set aside the money for my essential costs, built up a small emergency fund in a separate savings account, and every other penny went to debts. I had in effect, artificially made myself poor. Even though I had a nice paycheck coming in, I never saw it. This allowed me to avoid lifestyle inflation because I physically couldn’t inflate my lifestyle because I had no money to do it.
This turned out to be my savior. Even though lifestyle inflation has certainly happened to us (living off $600 per month is rather uncomfortable) we have kept our spending at about 30% of our income. And we do this by not even considering spending above the budget that we’ve set for ourselves. And it works pretty well. We don’t have to have endless self-control with our money, because we’ve set up our lives so that we never see that money. You can do the same. Here are some tips.
How to Artificially Make Yourself Poor to Make Yourself Rich in Reality
- Paycheck deductions.
Whenever you can, make the payments to your retirement accounts come from your paycheck before you ever get it. This makes it so that you never see this money in your bank account so you don’t ever miss it. Depending on your health care plan or what your employer offers you can do this with other expenses as well like health care premiums, flexible spending accounts, or HSAs. My employer even offers an account that deducts from your paycheck for putting money aside for childcare or elder care. Most of these deductions are tax advantaged as well so take advantage of what you can. The goal is to shrink your paycheck before you ever see it for things you needed to buy or fund anyway.
- Use separate accounts for savings vs spending.
Have one account that has the money going into it you are actually allowed to spend for the month. Everything else should go into a separate account so that you don’t even think about spending it.
- Get rid of the extra money.
If you have leftover money after paying for budgeted items get rid of the money. Don’t just let it sit in your account, tempting you to spend it. Use it to make extra payments to debts or move it into a brokerage account where you can invest it. Out of sight, out of mind when it comes to money.
Hope these tips help you as they have helped me and my family!